The FDR Framework is the backbone for a 21st century financial system. Under this framework, governments ensure that every market participant has access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to analyze this data because they are responsible for all gains and losses.

Sunday, February 10, 2013

Having failed to use the regulatory powers it has, Bank of Italy asks for more powers

One of the signature features of our current global financial crisis is global financial regulators failing to properly exercise the regulatory powers they have and then, after having the global financial system crash under their watch, asking for a second chance with more regulatory powers.

The latest financial regulator to do this is the Bank of Italy with the Monte Paschi derivative scandal.

Regular readers know that without access to all the useful, relevant information in an appropriate, timely manner the global financial system does not work because market participants cannot independently assess the risk of an investment and make a fully informed investment decision.

To make sure the global financial system works as designed under the FDR Framework, governments through their financial regulators are given the responsibility to ensure that market participants have access to all the useful, relevant information.

The Bank of Italy didn't fail to fulfill this responsibility once when it came to Monte Paschi, but it failed twice.

The first time it failed was when it knew about the derivatives in 2010, but failed to communicate this to the market. The second time it failed was when it made a loan to Monte Paschi and again failed to communicate this to the market.

Both times, Monte Paschi's management used the Bank of Italy's silence to present itself to the market as being in much better financial shape than it was actually in.

In both cases, the Bank of Italy knew of information that market participants would need to properly assess the risk and solvency of Monte Paschi and that this information was not disclosed.

Regulatory failure doesn't get any worse than this.

Yet, there is the Bank of Italy trying to defend itself and saying that if it only had more regulatory authority it could do a better job.

What is needed is not more regulatory authority which leads to the substitution of complex rules and regulator oversight for the combination of transparency and market discipline.

What is needed is far less regulatory authority and far more emphasis on making sure that market participants have access to all the useful, relevant information.

For bank regulators, this means requiring the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

Bank of Italy Governor Ignazio Visco called on Saturday for more powers for bank regulators to step in and dismiss bad managers but defended his institution's oversight of the troubled Monte dei Paschi di Siena.

Responding to criticism about banking oversight in the case of the Tuscan lender, Visco repeated that central bank supervisors had acted appropriately but asked for more scope to act in exceptional cases.

"The supervisor should have the power to intervene when - based on solid evidence - it believes it is necessary to oppose the appointment of (bank) executives or to remove them," Visco, who also sits on the European Central Bank governing council, said in a speech to the Assiom-Forex conference in Bergamo.

The comments echoed remarks from ECB President Mario Draghi...

Monte dei Paschi, Italy's third largest bank, has been at the centre of a financial and political storm over a series of problematic derivatives contracts which has widened into a probe by magistrates into suspected bribery and false accounting....

The central bank has repeatedly defended its handling of the case and detailed a series of steps it took, including inspections of Monte dei Paschi in 2010 and 2011 but it says it has no police-style powers.

Both regulators and the bank's new management said key evidence of problems with one of the opaque derivatives and structured finance trades at the heart of the case was not uncovered until last year....

As the Bank of Italy continued its efforts to clarify its actions regarding Monte dei Paschi, Saccomanni repeated that two securities lending operations in 2011 had been made to help the bank with liquidity strains.

About this blog

A blog on all things about Wall Street, global finance and any attempt to regulate it. In short, the future of banking and the global financial system.

This blog will be used to discuss and debate issues not just for specialists, but for anyone who cares about creating good policies in these areas.

At the heart of this blog is the FDR Framework which uses 21st century information technology to combine a philosophy of disclosure with the practice of caveat emptor (buyer beware).

Under the FDR Framework, governments are responsible for ensuring that all market participants have access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to use this data because under caveat emptor they are responsible for all gains and losses on their investments; in short, Trust but Verify.

This blog uses the FDR Framework to explain the cause of the financial crisis and to evaluate financial reforms like the ABS Data Warehouse.